Everything you need to know about crypto’s big moment: ‘the merge’

Tomorrow is going to be a little like that for the crypto world.

Granted, it’s not a perfect analogy. No one, as far as we know, is stockpiling canned foods and bottled water, or predicting that the world is going to go up in flames. But this is a historically significant week for cryptocurrency, and it revolves around a single moment: tomorrow afternoon, just before 3pm ET, the much-anticipated, almost mythologized Ethereum “merge” is scheduled to finally take place. Its ramifications are expected to be huge – but no one can say with absolute certainty how smoothly the process is going to go down.

What the hell is ‘the merge’ anyway?

Aside from being basically the only thing that most crypto enthusiasts have been able to discuss over the past few days, “the merge” is a phrase that refers to an impending software update for Ethereum, the blockchain network that manages the cryptocurrency Ether, or ETH. (Ether is currently the second-most valuable cryptocurrency in the world after Bitcoin.)

Doesn’t sound like such a huge deal, right? Most of us routinely download software updates to our iPhones, often without much of a noticeable effect. But this is more than a mere upgrade to the mechanics of how Ethereum operates; it’s an overhaul of some of the most fundamental principles of cryptocurrency – one that could have significant consequences, both within and beyond the crypto community. Google has even launched its own countdown to the merge to celebrate the event.

Since it first went online in the summer of 2015, the Ethereum network has relied on a system called “proof-of-work” (PoW), which is based on a network of computers solving complex mathematical puzzles as a prerequisite for facilitating transactions and mining new crypto assets on a blockchain. As the name suggests, PoW requires entities to submit evidence of a certain degree of computational effort before they can participate in the process of constructing a blockchain.

If those last couple sentences went clear over your head, don’t worry – the technical details don’t matter so much for our purposes here. What you should know are these two points:

1. PoW is also the framework for the Bitcoin network

2. PoW requires a vast (and we do mean vast) amount of energy in order to operate

Tomorrow, Ethereum will transition to – or merge with – a different system, called Proof-of-Stake (PoS), which has been shown to require substantially less energy, thereby (hopefully) making Ethereum much more eco-friendly. PoS is a system in which Ether holders stake some of their Ether in exchange for the ability to contribute to a blockchain.

According to some estimates, the merge could reduce Ethereum’s energy consumption by as much as 99%.

But it isn’t just a concern for Mother Earth that’s got crypto enthusiasts excited about the merge; there are also financial reasons. After the merge, investors will theoretically be able to earn interest off of Ether, just as they currently do through traditional financial instruments (like bonds, for example). Those who stake Ether in the new PoS system – ”stakers,” in industry parlance – will earn interest on the virtual currency they’ve put down. Stakers are expected to earn about 4% on their Ether investments post-merge, and that number will probably rise as time goes on.

This change could potentially encourage big-league investors to buy Ether, thereby potentially helping to push cryptocurrency further into mainstream consciousness – and perhaps helping to revive the value of Ether, which has suffered during the current “crypto winter.” There are some who are predicting that the merge could cause Ether to replace Bitcoin as the world’s most valuable cryptocurrency – a potentiality dubbed “the flippening.”

What could go wrong?

There are, of course, some catches.

For one thing, investors won’t be able to withdraw their staked Ether for at least several months, until the Ethereum network goes through yet another software upgrade. Return on investment, in other words, will take some time.

There may also be some kind of intervention from the US Securities and Exchange Commission (SEC). To date, the Commission has treated Ether as an ordinary commodity and therefore hasn’t bothered to impose regulations. But there are some who believe that the merge could technically transform Ether into securities, which might compel the SEC to step in. “Something no one is talking about: after the merge, there will be a strong case that Ether will be a security,” Georgetown law professor Adam Levitin tweeted in July. “The token in any proof-of-stake system is likely to be a security.”

Something no one is talking about: after the Merge, there's will be a strong case that Ether will be a security. The token in any proof of stake system is likely to be a security.

— Adam Levitin (@AdamLevitin) July 23, 2022

On Monday, Coinbase – the world’s leading crypto exchange platform – published a blog post outlining some other possible risks associated with the merge. Those were divided into three categories: technical, operational and economic. The merge “is the most technically complex upgrade to have ever happened in crypto,” the author of the blog post wrote,” but it “wouldn’t be happening in a few days if there hadn’t already been extensive testing and high confidence in its execution.”

Time will tell whether or not all that planning pays off. For now, the crypto world holds its breath.

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